Lower Natural Gas Price Is Not All Good News For Europe

Conor here: In the long run, Europe’s warm winter might not be seen as such a blessing. It allowed European politicians to keep burying their heads in the sand, push ahead with escalating the war with Russia, and sink deeper into the morass from which there will now only be a long, painful exit. Had it been one of the colder winters in recent memory, the popular revolt likely would have been so great they would have been forced to end their insanity.

By Tsvetana Paraskova, who has more than a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at Oilprice.com.

Europe successfully avoided a gas shortage crisis this winter thanks to high LNG imports, reduced demand, and milder weather. As a result, European natural gas prices have fallen to the levels from January 2022, just before the Russian invasion of Ukraine.  This week, the front-month futures at the TTF hub, the benchmark for Europe’s gas trading, hovered around $47 (43 euros) per megawatt-hour (MWh), down from over $142 (130 euros) at the start of the 2022/2023 winter heating season and from the record-high of $350 (320 euros) per MWh in August 2022.

Warmer winter weather and subdued LNG demand from Asia helped Europe fill storage sites to adequate levels before the heating season and exit that season with inventories well above historical averages.

As fears of a gas crunch have subsided this winter, pulling European natural gas prices down, Europe shouldn’t count on another warmer-than-usual winter and less competition from Asia as it starts to prepare for the 2023/2024 winter, analysts say.

Contrary to initial expectations, the 2022/2023 winter went surprisingly well, but the energy crisis isn’t over, and Europe is not out of the woods yet.

Last year, Asia—including China—saw LNG imports decline amid high spot prices and a slowdown in the Chinese economy. With China’s reopening, however, demand for gas and LNG is set to rebound, increasing the competition between Asia and Europe for spot supply, analysts say.

They also warn that next winter could be much worse for Europe if Asian—especially Chinese—demand rebounds and intensifies the competition between the European and Asian markets for drawing more LNG supply.

In a market with stronger competition from Asia for LNG supply, the current European gas prices may not be enough to continue attracting spot cargoes, analysts at Swedish bank SEB said in a note this week.

The current European gas price is too low. Prices between 60 and 75 euros/MWh are probably needed in 2023 to keep demand subdued, LNG imports high, and inventories elevated.

“The EU will have to match whatever Asia is willing to pay plus a premium in a bidding war to keep LNG imports flowing to the EU,” SEB analysts wrote.

The bank expects the European TTF price to climb from early to mid-April and average 60 euros/MWh in the second quarter of 2023, followed by 70 euros/MWh and 75 euros/MWh for Q3 and Q4, respectively.

Spot LNG demand in Asia hasn’t been great so far this year, with prices falling to a 21-month low last week, per industry estimates cited by Reuters

The weekly average front-month futures prices for LNG cargoes in East Asia fell to $12.72 per million British thermal units (MMBtu) in the week to March 30, the EIA said in its weekly report citing data from Bloomberg Finance. On the other hand, the equivalent of Europe’s benchmark price in MMBtu rose to a weekly average of $13.47/MMBtu.

Europe’s price is still above the one in Asia by a slight margin, but with Asian demand expected to pick up later this year with the Chinese reopening, European importers may have to pay up for spot supply to beat competition from the Asian market.

Last year, LNG imports to China fell by an extraordinary 20%, Wood Mackenzie has estimated.

“One of the risks of China’s return to normality has been the impact it could have on European gas imports which swallowed up a substantial proportion of the supply void left by the country’s relative inactivity,” the consultancy said in a report on how the Chinese reopening could super-charge energy commodity prices this year.

According to WoodMac, European LNG imports for this year are safe for now.

“[The] global gas market is not out of the woods; it is a structurally tight market and prices are volatile,” said Massimo Di Odoardo, Vice President, Gas and LNG research, at WoodMac.

“But with demand trimmed by high prices, recent mild weather and markets proving resilient in a world without Russian pipeline exports to Europe, stronger-than-expected Chinese LNG demand is unlikely to lead to a repeat of the chaos seen in 2022.”

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  1. The Rev Kev

    The EU is going to be screwed next winter. The past winter they were able to save gas as it was a mild one and they could make cuts on consumption here and there. But what about the summer? If they want to make cuts on gas consumption, the only realistic place that they could take it from will be industry. You know, the thing that powers the economy and provides employment. Certainly not from heating. Asia will create their own demands on gas supplies and I do not think that the EU has been able to replace the amount of gas that they use to get from the Russian Federation. And that means that unlike last year, they won’t be able to fill up their reserves while running their economy. And any politician that says that gas sacrifices have to be made to help the Ukrainians, well, it will not end well for that politician.

  2. Format

    I just wonder what the US thinks about lower natural gas prices. While the American consumer might certainly like it, oil companies will not be able to export their LNG to the EU with as high profits as before. Maybe the companies will try to prolong the EU energy crisis to profit from it.

    The gas price was a big theme in the 2022 US midterm elections. If the low gas price persists, the Democrats might try to get votes by taking credit for the lower gas prices for the 2024 presidential elections. What would the Republican counterargument then be?

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